Quarterly Report July - September 2016 · This second Quarterly Report of the Securities and...

Quarterly ReportJuly - September 2016

Contents2 Highlights

3 Operational Review3 Intermediaries

5 Investment products

7 Listings and takeovers

8 Market infrastructure and trading

9 Enforcement

11 Global regulatory engagement

12 Stakeholder communication

14 Corporate Developments

15 Activity Data

19 Financial Statements19 Securities and Futures Commission

29 Investor Compensation Fund

38 Unified Exchange Compensation Fund

This second Quarterly Report of the Securities and Futures Commission for financial year 2016-17 covers the period from 1 July to 30 September 2016.

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2 Quarterly Report July - September 2016

Highlights

Regulatory enhancements Asset management review: We launched a public consultation on proposals to enhance the regulations

governing the asset management industry in Hong Kong.

Listing regulatory structure: Our joint consultation with The Stock Exchange of Hong Kong Limited (SEHK) on proposed enhancements to the decision-making and governance structure for listing regulation ended in November following a two-month extension.

OTC derivatives: With the Hong Kong Monetary Authority, we concluded an earlier consultation on introducing mandatory clearing and expanding mandatory reporting for the second stage of the over-the-counter (OTC) derivatives regulatory regime.

Position limit regime: We launched a consultation on enhancements to expand the scope of the position limit regime for futures and options contracts.

Listings and takeovers Listing applications: Under the dual filing regime, we vetted 84 listing applications alongside SEHK during the quarter,

up 37.7% year-on-year, a record high since the regime commenced in 2003.

Takeovers matters: The Takeovers and Mergers Panel upheld the Takeovers Executive’s1 ruling that an offer for the shares of L&A International Holdings Limited complied with the Takeovers Code.

Intermediaries Licensees and registrants: As of 30 September, the total number of licensed corporations, individuals and

registered institutions reached a record high of 42,571.

Intermediary inspection: We conducted 81 risk-based on-site inspections of licensed corporations and shared our findings on breaches and instances of non-compliance identified during past inspections of introducing brokers.

Market development Stock Connect: In August, the SFC and the China Securities Regulatory Commission jointly announced the in-

principle approval for Shenzhen-Hong Kong Stock Connect, which was launched on 5 December.

Enforcement Disciplinary actions: We disciplined four corporations and eight licensed representatives, resulting in total fines

of $25.8 million.

Market surveillance: We made 2,168 requests for trading and account records from intermediaries following our surveillance of untoward price and turnover movements.

Global engagement International collaboration: With regulatory counterparts from Europe and Singapore, we organised the

inaugural European Union-Asia Pacific Forum on Financial Regulation.

1 This refers to the Executive Director of the SFC’s Corporate Finance Division or his delegate.

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3Quarterly Report July - September 2016

Intermediaries

Licensing applicationsDuring this quarter, we received 2,278 licence applications1, up 25.4% from the previous quarter and down 5.7% from the same quarter last year. As at 30 September, the total number of licensees and registrants reached 42,571. This is a record high since the implementation of the Securities and Futures Ordinance on 1 April 2003.

Monitoring We conducted 81 risk-based on-site inspections of licensed corporations to review their compliance with relevant regulatory requirements in the quarter.

On 30 September, we issued an advisory circular to share findings of past inspections conducted on licensed corporations engaging in the introducing broker business2, which identified various breaches and instances of non-compliance with the SFC’s licensing, Code of Conduct3 and Anti-Money Laundering (AML) Guideline4 requirements. We also reminded licensed firms to implement adequate controls to ensure compliance.

Promoting complianceDuring the quarter, we issued 10 advisory circulars to enhance the industry’s awareness of the latest developments in AML and counter-terrorist financing (CTF).

As part of our ongoing effort to promote compliance with AML and CTF requirements, we gave two presentations in July to around 500 industry participants, including management and compliance personnel from licensed corporations.

Financial resolution regimeThe Financial Institutions (Resolution) Ordinance, which establishes a regime for the resolution of financial institutions in Hong Kong, was gazetted on 30 June. The Government of the Hong Kong Special Administrative Region, the Hong Kong Monetary Authority, the Insurance Authority and the SFC are preparing for the new regime and will launch a public consultation on the draft subsidiary legislation.

Licensees and registrants

As at

30.9.2016As at

31.3.2016Change

(%)As at

30.9.2015

YoYchange

(%)

Licensed corporations 2,318 2,208 5 2,125 9.1

Registered institutions 120 119 0.8 118 1.7

Licensed individuals 40,133 39,207 2.4 39,008 2.9

Total 42,571 41,534 2.5 41,251 3.2

1 The figure does not include applications for provisional licences. See the table on licensing applications on page 4 for details.2 Referring to the introduction of clients to other brokers (execution broker) with which the clients open accounts for trading in securities, futures

and/or leveraged foreign exchange contracts, with or without providing the service of relaying trade orders of the client to the execution broker.3 The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.4 Guideline on Anti-Money Laundering and Counter-Terrorist Financing.

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Intermediaries

Licensing applications

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoYchange

(%)

Applications to conduct new regulated activity 6,644 11,625 12,211 -4.8

Applications for SFC licences# 2,278 4,094 4,221 -3# Figures do not include applications for provisional licences. During the quarter, we received 1,283 provisional licence applications compared with

1,477 in the same quarter last year.

Intermediary inspection

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoYchange

(%)

Risk-based on-site inspections conducted 81 152 156 -2.6

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Investment products

AuthorizationsAs of 30 September 2016, there were 2,751 SFC-authorized collective investment schemes (CIS) on offer to the public. During the quarter, we authorized 33 CIS, comprising 32 unit trusts and mutual funds and one investment-linked assurance scheme.

For the quarter ended 30 September 2016, we authorized 52 unlisted structured investment products for public offering.

Renminbi productsAs of 30 September 2016, the total number of SFC-authorized RQFII1/Stock Connect unlisted funds and exchange-traded funds (ETFs)2 were 68 and 25 respectively.

Suitability, platforms and advice We are reviewing and will provide additional guidance to clarify our expectations on the suitability requirement, including how it should be implemented across different business models such as in the context of exchange and online fund distribution platforms and robo-advice, as well as in the more traditional broker channel.

Enhancing asset management regulationsOn 23 November 2016, we issued a consultation paper on proposals to enhance asset management regulations and point-of-sale transparency. The consultation paper’s proposals have been formulated following a review of major international regulatory developments in the asset management industry, and taking into account comments received from the SFC’s soft consultation meetings with industry stakeholders.

The proposals cover topics including commissions and independent advice, securities lending and repurchase agreements, safe custody of fund assets and liquidity management. The consultation will end on 22 February 2017.

Mainland-Hong Kong Mutual Recognition of FundsAs of 30 September 2016, we authorized a total of 45 Mainland funds (including two umbrella funds), and the China Securities Regulatory Commission approved six Hong Kong funds.

Industry guidance We published frequently asked questions (FAQs) on the disclosure and approval requirements for an existing SFC-authorized fund that intends to make investments in the mainland China interbank bond market (CIBM) after the People’s Bank of China's announcement on investment in CIBM without any quota restriction. We also published another FAQ to clarify the requirement for the adoption of additional trading counters for an ETF.

Fund Management Activities Survey

In July, we released the annual Fund Management Activities Survey for 2015. The findings showed that Hong Kong’s combined fund management business decreased slightly by 1.6% year-on-year to $17,393 billion as of 31 December 2015.

1 Renminbi Qualified Foreign Institutional Investor.2 The RQFII/Stock Connect unlisted funds and ETFs are renminbi-denominated funds which primarily invest in Mainland securities markets through

either the RQFII quota, Stock Connect or both.

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Investment products

Authorized collective investment schemes (CIS)a

As at

30.9.2016As at

31.3.2016Change

(%)As at

30.9.2015

YoYchange

(%)

Unit trusts and mutual funds 2,183 2,133 2.3 2,090 4.4

Investment-linked assurance schemes 300 301 -0.3 295 1.7

Pooled retirement funds 34 34 0 35 -2.9

MPF schemes 37 37 0 37 0

MPF pooled investment funds 171 173 -1.2 171 0

Othersb 26 26 0 26 0

Total 2,751 2,704 1.7 2,654 3.7a Excluding unlisted structured investment products.b Comprising 15 paper gold schemes and 11 real estate investment trusts as of 30 September 2016.

Unlisted structured investment products

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoYchange

(%)

Unlisted structured investment productsa 52 59 59 0

Authorizations granted under section 105 of the SFOb 34 48 49 -2a On a “one product per key facts statement” basis, the number of unlisted structured investment products authorized during the period, most of

which were equity-linked investments and deposits.b Offering documents and advertisements for unlisted structured investment products offered to the Hong Kong public.

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Listings and takeovers

Listing regulatory structure On 17 June, we launched a two-month joint consultation with Hong Kong Exchanges and Clearing Limited on proposed enhancements to The Stock Exchange of Hong Kong Limited’s (SEHK) decision-making and governance structure for listing regulation. To give all interested parties further time to file their responses, the consultation period was extended by two months to 18 November.

IPO applicationsUnder the dual filing regime, we received 84 listing applications via SEHK during the quarter, up 18.3% from 71 in the previous quarter and 37.7% from 61 in the same period last year. This was a record high since the regime commenced in 2003. Two listing applications were returned and an eight-week moratorium1 was imposed because the respective application proofs were not substantially complete.

Takeovers mattersOn 15 September, we gazetted a new filing form for all applications for rulings by the Takeovers Executive2 made under section 8 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-backs.

In the September issue of the Takeovers Bulletin, we reminded industry participants that all applications for rulings must be submitted together with the duly completed filing form effective from 16 September.

In September, the Takeovers and Mergers Panel upheld the Takeovers Executive’s ruling that the consideration offered by Favourite Number Limited for shares of L&A International Holdings Limited already complied with the Takeovers Code and that there was no basis to alter it as requested by L&A. The Panel’s written decision was published on 12 October.

Corporate regulation During the quarter, we continued to conduct a daily review of corporate announcements under the statutory corporate conduct and inside information disclosure provisions. In 27 cases, we felt it appropriate to issue section 1793 directions to gather additional information. The underlying concerns were varied and included whether any information that may meet the tests for inside information had been disclosed in a timely manner.

1 The applicant can only submit a new listing application with a new application proof no less than eight weeks after the return.2 This refers to the Executive Director of the SFC’s Corporate Finance Division or his delegate.3 Section 179 of the Securities and Futures Ordinance gives the SFC the power to compel the production of records and documents from persons

related to a listed company.

Listing applications and takeovers activities

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoYchange

(%)

Listing applications filed under the dual filing regime 84 155 123 26

Takeovers and share buy-backs transactions 108 221 228 -3.1

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Market infrastructure and trading

Shenzhen-Hong Kong Stock Connect In August, the SFC and the China Securities Regulatory Commission (CSRC) issued a joint announcement on the in-principle approval for Shenzhen-Hong Kong Stock Connect, which enables mutual stock market access between the Shenzhen Stock Exchange and The Stock Exchange of Hong Kong Limited. Trading commenced on 5 December. Over the past few months, we worked closely with the CSRC, Shenzhen Stock Exchange, China Securities Depository and Clearing Corporation Limited and Hong Kong Exchanges and Clearing Limited (HKEX) on regulatory and operational issues to prepare for the launch.

Position limit regime

In September, we launched a public consultation on enhancements to the position limit regime for futures and options contracts. The proposals aim to expand the scope of the existing regime and make it more responsive to developments in the financial market.

OTC derivatives

In July, the SFC and the Hong Kong Monetary Authority published conclusions to an earlier consultation on introducing mandatory clearing and expanding mandatory reporting for the second stage of the over-the-counter (OTC) derivatives regulatory regime. We implemented mandatory clearing of certain standardized OTC derivatives and designated four central counterparties for the purpose of mandatory clearing in September.

ATS

As at

30.9.2016As at

30.6.2016Change

(%)As at

30.9.2015

YoYchange

(%)

ATS authorizations under Part III 44 39 12.8 35 25.7

Corporations provide ATS under Part V 24 24 0 28 -14.3

HKEX

During the quarter, we approved HKEX’s rule amendments for introducing a Closing Auction Session (CAS), which includes major index constituents and all exchange-traded funds, and a Volatility Control Mechanism (VCM) for the securities market. We also enhanced our real-time market surveillance system to cover the CAS and VCM.

Automated trading services

As of 30 September 2016, the number of automated trading services1 (ATS) authorizations under Part III of the Securities and Futures Ordinance (SFO) was 44 while 24 corporations, including 16 dark pool operators, were licensed under Part V of the SFO to provide ATS.

1 As a general principle under the SFC’s Guidelines for the Regulation of Automated Trading Services, ATS providers which also perform traditional dealer functions (eg, agency broking, holding of clients’ securities or funds) are expected to be licensed under Part V of the SFO, while those solely providing ATS are expected to be authorized under Part III of the SFO.

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Enforcement

Market Misconduct Tribunal We started proceedings in the Market Misconduct

Tribunal (MMT) against Samantha Keung Wai Fun, former CEO of China AU Group Holdings Limited1, Wu Hsiu Jung and Chen Kuo-chen for false trading in China AU shares. Wu and Chen used 14 securities accounts to trade substantial amounts of China AU shares, with Keung providing a majority of the funds.

We started proceedings in the MMT against Cheng Chak Ngok, former senior executive of ENN Energy Holdings Limited, for alleged insider dealing in the shares of China Gas Holdings Limited. We alleged that Cheng purchased China Gas shares in late 2011 upon knowing the details of the pre-conditional voluntary general offer for China Gas.

The MMT ruled that Lo Hang Fong, a former company secretary of Warderly International Holdings Limited, and Luu Hung Viet Derrick, a lender and potential investor of Warderly, had not engaged in insider dealing in Warderly shares in 2007.

Restriction NoticeWe issued a Restriction Notice to BOCI Securities Limited in September prohibiting it from processing shares and money held in two client accounts which hold the proceeds of suspected insider dealing. BOCI is not a suspect of the investigation.

Disciplinary actionsWe disciplined four corporations and eight licensed representatives:

Morgan Stanley Hong Kong Securities Limited was reprimanded and fined2 $18.5 million for internal control failures in a number of areas.

The Hongkong and Shanghai Banking Corporation Limited (HSBC) was reprimanded and fined $2.5 million for regulatory breaches and internal control failings related to position limit failures.

BNP Paribas Wealth Management was reprimanded and fined $4 million for taking monetary benefits in excess of the levels stated in its client documentation.

Quam Capital Limited was fined $800,000 for failing to discharge its duties as a sponsor when preparing the listing prospectus of Gayety Holdings Limited3 on the Growth Enterprise Market.

Chan Hau Wing, a former employee of Yue Xiu Futures Company Limited, was banned from re-entering the industry for two years for conducting unauthorised trades in a client’s account.

Wong Lap Yin was prohibited from re-entering the industry for three years for manipulating the share price of China Nonferrous Metals Company Limited and carrying out unauthorised trades in a client’s account.

Ko Cho Ting was suspended for two years for executing suspicious client orders and operating a secret securities account.

Lam Chun Yin and Yeung Chok Cheong, two former representatives of United Simsen Securities Limited4 were fined and banned from re-entering the industry for 36 months and 30 months respectively for failing to take all reasonable steps to avoid conflicts of interest and for trading on non-public information.

Ku Yuen Leung, a former account executive of BOCOM International Securities Limited, was suspended for 18 months for creating a false or misleading appearance in the market for shares of Agricultural Bank of China Limited to drive up the prices of five related call warrants.

Chau Hang Yu and Steve Chow Chun Yin, both former employees of HSBC, were banned from re-entering the industry for life following their criminal convictions for fraud under the Theft Ordinance.

Market surveillanceWe made 2,168 requests for trading and account records from intermediaries in the quarter. In addition, we posted five high shareholding concentration announcements on our website to remind investors to exercise caution when trading shares in companies where a small number of shareholders hold a high concentration of shares.

1 Now known as Skynet Group Limited.2 Fines paid to or recovered by the SFC go into the general revenue of the Government.3 Now known as Food Idea Holdings Limited.4 Now known as Huarong International Securities Limited.

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Enforcement

Enforcement activities

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoYchange

(%)

S179a inquiries commenced 10 14 13 7.7

S181b inquiries commenced (number of letters sent) 60 (2,168) 141 (4,404) 131 (3,931) 7.6

S182c directions issued 88 246 251 -2

Investigations started 91 251 255 -1.6

Investigations completed 129 294 238 23.5

Investigations completed within seven months (%) 66 (51%) 141 (48%) 127 (53%) 11

Individuals/corporations charged in criminal proceedings 4 4 4 0

Criminal charges laid 15 15 19 -21.1

Notices of Proposed Disciplinary Actiond issued 9 25 15 66.7

Noticese of decision issued 13 23 17 35.3

Individuals/corporations subject to ongoing civil proceedings 108 108 88 20.5

Compliance advice letters issued 181 268 230 16.5

Cases with search warrants executed 11 19 18 5.6a Section 179 of the SFO gives the SFC the power to compel the production of records and documents from persons related to a listed company in

relation to fraud or other misconduct. b Section 181 of the SFO gives the SFC the power to require information from intermediaries about trading transactions, including the identity

information of the ultimate clients, the particulars and instructions relating to the transactions. c Section 182 of the SFO gives the SFC the power to investigate SFO offences, market misconduct, fraud, misfeasance and disciplinary misconduct. d A notice issued by the SFC to regulated persons that it proposes to exercise its disciplinary powers, on grounds that they appear to be guilty of

misconduct or not fit and proper. e A notice that sets out the SFC’s decision and its reasons to take disciplinary action against regulated persons.

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Global regulatory engagement

IOSCOFollowing the May appointment of Mr Ashley Alder, our Chief Executive Officer, as Chairman of the Board of the International Organization of Securities Commissions (IOSCO), he formulated measures to streamline IOSCO Board priorities and processes, work closely with the Financial Stability Board (FSB) and enhance collaboration between emerging and developed markets.

Mr Alder also chairs the IOSCO Task Force on Market Conduct which examines the regulatory approaches and tools related to the conduct of traders and other professionals in wholesale markets.

We participated in the work of the IOSCO Asia-Pacific Regional Committee on monitoring extraterritorial rulemaking, strengthening regional enforcement and supervisory cooperation, and mapping regional regulatory frameworks for collective investment schemes.

We worked closely with the European Commission and the Monetary Authority of Singapore to organise the inaugural European Union (EU)-Asia Pacific Forum on Financial Regulation. The Forum will be held on a regular basis to enhance information exchange and cross-border cooperation between regulators from the EU and the Asia Pacific region.

FSBIn July, Mr Alder attended the meeting of the FSB Plenary to discuss, among other things, market liquidity and the impact of financial regulatory reforms, central counterparties, asset management activities and initiatives to ensure fair and effective wholesale fixed income, currencies and commodities markets.

During the quarter, we coordinated with Hong Kong Monetary Authority (HKMA), the Office of the Commissioner of Insurance and the Government of the Hong Kong Special Administrative Region to respond to the FSB’s annual monitoring exercise on shadow banking and its survey on the implementation status of non-priority reforms.

Other international collaborationWe responded to requests for technical assistance and training from overseas regulators and authorities. We also hosted delegations from regulators and international financial institutions from Asia, Europe and the US.

Mainland ChinaWe received delegates from the Shenzhen and Shanghai stock exchanges and a related clearing house to discuss market surveillance and other issues relating to Stock Connect. We also met with a Vice Chairman and members of the Shanghai Committee of the Chinese People's Political Consultative Conference to introduce the regulatory environment in Hong Kong’s financial market.

A new agreement on trade in services under Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) was signed on 27 November 2015 and implemented on 1 June 2016. We participated in discussions with Mainland authorities to formulate new measures for the securities sector, including relaxing shareholding requirements for Hong Kong financial institutions establishing joint ventures on the Mainland. In September, the first joint venture Mainland fund management company majority owned by foreign investors was established under the CEPA framework.

In August, we met with officials from the China Securities Regulatory Commission (CSRC) to discuss public relations practices. We also shared with the CSRC our experience of participating in international financial development assessments.

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Stakeholder communication

We engage with a wide range of stakeholders in a proactive, timely and effective manner to help them understand our work and keep them informed about regulatory updates.

In September, we launched a consultation proposing enhancements to the position limit regime by expanding its scope and making it more responsive to financial market developments1 while the deadline for responding to the joint consultation on listing regulation was extended by two months2.

Jointly with the Hong Kong Monetary Authority, we published further conclusions in July on proposals to introduce mandatory clearing and expand mandatory reporting for the second stage of the over-the-counter (OTC) derivatives regulatory regime1.

1 See Market infrastructure and trading on page 8 for details.2 See Listings and takeovers on page 7 for details.3 Institute of Financial Planners of Hong Kong.

Our senior executives attend The Hong Kong Institute of Chartered Secretaries’ 10th Biennial Corporate Governance Conference

Ms Christina Choi, Executive Director, Investment Products, addresses IFPHK's3 Financial Planning Conference 2016

During the quarter, our senior executives spoke at 14 local and international conferences to share our regulatory approaches on various areas. We also supported three industry events which promote the standards of the industry.

We produced a wide range of industry-related publications, including:

the half-yearly Financial Review of the Securities Industry which provides statistical and financial information about securities dealers and securities margin financiers as well as the financial performance of participants of The Stock Exchange of Hong Kong Limited;

the annual Fund Management Activities Survey of licensed corporations, registered institutions and insurance companies;

the September issue of the Takeovers Bulletin, a quarterly newsletter to help industry participants better understand the Codes on Takeovers and Mergers and Share Buy-backs; and

the Half-yearly Review of the Global and Local Securities Markets, an overview of stock market performance, key economic indicators and market risks.

We issued 15 circulars to inform industry participants of matters related to client agreement requirements, the OTC derivatives regime and anti-money laundering.

We also briefed visitors on the SFC’s regulatory work, including a group of 30 students from overseas.

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Publications and other communications

Quarter ended

30.9.2016

Six monthsended

30.9.2016

Six monthsended

30.9.2015

YoYChange

(%)

Press releases 28 56 52 7.7

Consultation papers 1 2 2 0

Consultation conclusions 1 1 3 -66.7

Industry-related publications 4 5 6 -16.7

Circulars to industry 15 26 32 -18.8

Corporate website average daily page views1 57,632 57,450 49,811 15.3

General enquiries 1,571 3,299 3,436 -41 The average number of web pages browsed per day during the reporting period.

Stakeholder communication

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Corporate Developments

The Government reappointed Ms Teresa Ko and Dr William Wong as Non-Executive Directors for two-year terms effective from 1 August.

Ms Christina Choi was appointed as Executive Director of Investment Products for a three-year term effective from 1 August.

Mr Thomas Atkinson, Executive Director of Enforcement, was appointed as a member of both the Securities Compensation Fund Committee1 and the Investor Compensation Fund Committee2 effective from 28 September.

Our income for the quarter was $372 million, up 30% from the previous quarter. In the quarter, average daily turnover in Hong Kong’s securities market was $71 billion, 13% higher than the previous quarter. Our expenditure for the quarter was $423 million. We recorded a deficit of $51 million this quarter, compared to a deficit of $129 million last quarter. As at 30 September, our reserves stood at $7.1 billion, of which $3 billion was set aside for possible future acquisition of office premises.

To raise efficiency, we introduced an electronic channel for the submission of investment products information and automated our licensing system to handle corporate amalgamations of licensed corporations.

During the quarter, we organised study visits to our counterparts in Shanghai and Shenzhen to enrich our employees’ understanding of the Mainland capital markets and regulatory regime.

As of 30 September, we had 860 staff members, up from 814 a year ago.

Finances

($ million)

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoYchange

(%)

Income 372 659 973 -32

Expenses including depreciation 423 838 756 11

1 The primary role of the Securities Compensation Fund Committee is to administer the Unified Exchange Compensation Fund, which applies in respect of claims arising before 1 April 2003.

2 The primary role of the Investor Compensation Fund Committee is to administer the Investor Compensation Fund, which applies in respect of claims arising on or after 1 April 2003.

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Activity Data

Table 1 Breaches noted during on-site inspections

Nature of breaches

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoY change

(%)

Failure to comply with Securities and Futures (Financial Resources) Rules 3 7 9 -22.2

Failure to safekeep client securities 16 23 17 35.3

Failure to maintain proper books and records 8 18 12 50

Failure to safekeep client money 16 30 20 50

Unlicensed dealing and other registration issues 3 9 14 -35.7

Breach of licensing conditions 0 1 4 -75

Breach of requirements of contract notes/statements of account/receipts 16 35 33 6.1

Failure to make filing/notification 3 3 3 0

Breach of margin requirements 1 1 4 -75

Marketing malpractices 0 0 0 0

Illegal short selling of securities 0 0 0 0

Dealing malpractices 4 6 2 200

Breach of Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission1 114 240 143 67.8

Breach of Corporate Finance Adviser Code of Conduct 5 16 6 166.7

Breach of Fund Manager Code of Conduct 13 35 30 16.7

Breach of regulation of on-line trading 4 6 6 0

Non-compliance with anti-money laundering guidelines 63 118 137 -13.9

Breach of other rules and regulations of the Exchanges2 1 8 5 60

Breach of other rules and regulations of the Mandatory Provident Fund Schemes Authority 0 0 0 0

Internal control weaknesses3 142 259 240 7.9

Others 23 40 58 -31

Total 435 855 743 15.11 Commonly related to risk management, record keeping, client agreements, safeguarding of client assets and management responsibilities.2 Comprising The Stock Exchange of Hong Kong Limited and Hong Kong Futures Exchange Limited.3 Comprising deficiencies in management review and supervision, operational controls over the handling of client accounts, segregation of duties,

information management, adequacy of audit trail for internal control purposes, among other weaknesses.

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Activity Data

Table 2 Authorized unit trusts and mutual funds – by type and number

Number as at

30.9.2016

Number as at

31.3.2016Change

(%)

Number as at

30.9.2015

YoYchange

(%)

Bond 412 404 2 407 1.2

Equity 1,034 1,031 0.3 1,021 1.3

Diversified 163 140 16.4 111 46.8

Money market 44 46 -4.3 50 -12

Fund of funds 106 102 3.9 102 3.9

Index1 172 161 6.8 154 11.7

Guaranteed 3 3 0 3 0

Hedge 2 3 -33.3 3 -33.3

Other specialised2 10 14 -28.6 14 -28.6

Sub-total 1,946 1,904 2.2 1,865 4.3

Umbrella structures 237 229 3.5 225 5.3

Total 2,183 2,133 2.3 2,090 4.41 Including leveraged and inverse products. 2 Including futures and options funds, structured funds and funds that invest in financial derivative instruments.

Table 3 Authorized unit trusts and mutual funds – by type and assets under management

Total NAV(US$ million)

as at 30.9.20161


as at 31.3.2016

Change (%)


as at 30.9.2015

YoYchange

(%)

Bond 461,716 423,7582 9 427,862 7.9

Equity 622,336 608,782 2.2 584,707 6.4

Diversified 133,511 117,242 13.9 110,003 21.4

Money market 19,268 21,315 -9.6 22,288 -13.5

Fund of funds 16,611 15,651 6.1 15,468 7.4

Index3 97,779 87,530 11.7 78,676 24.3

Guaranteed 71 69 2.9 71 0

Hedge 38 110 -65.5 114 -66.7

Other specialised4 1,407 1,576 -10.7 1,704 -17.4

Total 1,352,7365 1,276,0332 6 1,240,893 91 Beginning from 30 June 2016, total net asset value (NAV) is presented in quarterly reports. For comparison purposes, total NAV figures as of 31

March 2016 and 30 September 2015 are also presented.2 This figure differs from that disclosed in the Annual Report 2015-16 due to revised figures reported by fund managers after the report’s issuance.3 Including leveraged and inverse products. 4 Including futures and options funds, structured funds and funds that invest in financial derivative instruments.5 Figure does not add up to total due to rounding.

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Table 4 Authorized unit trusts and mutual funds – by origin and number

Number as at

30.9.2016

Number as at

31.3.2016Change

(%)

Number as at

30.9.2015

YoYchange

(%)

Hong Kong 695 656 5.9 628 10.7

Luxembourg 1,006 1,004 0.2 1,010 -0.4

Ireland 268 277 -3.2 281 -4.6

United Kingdom 69 65 6.2 65 6.2

Mainland China 45 27 67 0 N/A

Other Europe 3 0 N/A 0 N/A

Bermuda 5 5 0 5 0

Cayman Islands 84 90 -6.7 92 -8.7

Others 8 9 -11 9 -11

Total 2,183 2,133 2.3 2,090 4.4

Table 5 Authorized unit trusts and mutual funds – by origin and assets under management


as at 30.9.20161


as at 31.3.2016

Change (%)


as at 30.9.2015

YoYchange

(%)

Hong Kong 125,967 118,1722 6.6 110,803 13.7

Luxembourg 889,124 860,620 3.3 854,348 4

Ireland 160,813 150,267 7 150,972 6.5

United Kingdom 93,351 78,830 18.4 76,250 22.4

Mainland China 23,007 10,880 111.5 0 N/A

Other Europe 67 0 N/A 0 N/A

Bermuda 241 292 -17.5 309 -22

Cayman Islands 12,051 15,253 -21 13,890 -13

Others 48,116 41,719 15.3 34,321 40.2

Total 1,352,7363 1,276,0332 6 1,240,8943 91 Beginning from 30 June 2016, total NAV is presented in quarterly reports. For comparison purposes, total NAV figures as of 31 March 2016 and 30

September 2015 are also presented.2 This figure differs from that disclosed in the Annual Report 2015-16 due to revised figures reported by fund managers after the report’s issuance.3 Figure does not add up to total due to rounding.

Activity Data

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Activity Data

Table 6 Takeovers activities

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoY change

(%)

Codes on Takeovers and Mergers and Share Buy-backs

General and partial offers under Code on Takeovers and Mergers 17 29 21 38.1

Privatisations 4 8 4 100

Whitewash waiver applications 5 16 29 -44.8

Other applications under Code on Takeovers and Mergers1 82 167 171 -2.3

Off-market and general offer share buy-backs 0 1 1 0

Other applications under Code on Share Buy-backs1 0 0 2 -100

Total 108 221 228 -3.1

Executive Statements

Sanctions imposed with parties’ agreement2 0 2 0 N/A

Takeovers and Mergers Panel

Meetings for review of Codes on Takeovers and Mergers and Share Buy-backs 0 0 0 N/A

Hearings before the Panel (disciplinary and non-disciplinary) 1 2 0 N/A

Statements issued by the Panel3 0 1 2 -501 Including stand-alone applications and those made during the course of a Code-related transaction.2 Pursuant to section 12.3 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-backs.3 Pursuant to section 16.1 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-backs.

Table 7 Complaints against intermediaries and market activities

Quarter ended

30.9.2016

Six months ended

30.9.2016

Six months ended

30.9.2015

YoY change

(%)

Conduct of licensees 79 178 162 9.9

Conduct of registered institutions 11 25 20 25

Listing-related matters and disclosure of interests 174 329 392 -16.1

Market misconduct1 46 98 76 28.9

Product disclosure 2 5 0 N/A

Unlicensed activities 24 58 73 -20.5

Breach of offers of investments 16 22 4 450

Other financial activities2 140 325 422 -23

Total 492 1,040 1,149 -9.51 Primarily, alleged market manipulation and insider dealing.2 Comprising boiler rooms, insurance and bullion activities, identity frauds, etc.

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Securities and Futures Commission

IntroductionWe have reviewed the accompanying condensed consolidated and the condensed statement of financial position of the Securities and Futures Commission (SFC) as at 30 September 2016, the condensed consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the six-month period then ended, and notes to the interim financial information on pages 21 to 28 (the condensed consolidated interim financial information). The directors are responsible for the preparation and presentation of this condensed consolidated interim financial information in accordance with Hong Kong Accounting Standard (HKAS) 34, Interim financial reporting. Our responsibility is to form a conclusion on this condensed consolidated interim financial information based on our review.

Scope of reviewWe conducted our review in accordance with the Hong Kong Standard on Review Engagements 2410, Review of interim financial information performed by the independent auditor of the entity. A review of the condensed interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

ConclusionBased on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial information as at 30 September 2016 is not prepared, in all material respects, in accordance with HKAS 34, Interim financial reporting.

KPMG Certified Public Accountants 8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong

5 December 2016

Independent Auditors' Report on Review of Interim Financial Informationto the Securities and Futures Commission (Established in Hong Kong under the Securities and Futures Commission Ordinance)

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Unaudited and

unreviewedThree months

ended30 September

2016

Unaudited and


ended30 September

2015$’000 $’000

Income

Levies 263,762 374,605

Fees and charges 34,012 41,271

Investment income/(loss) 74,287 (62,137)

Less : custody and advisory expenses (1,487) (855)

Investment income/(loss) net of third party expenses 72,800 (62,992)

Recoveries from the Investor Compensation Fund 1,390 1,342

Other income 284 213

372,248 354,439

Expenses

Staff costs and directors’ emoluments 304,971 279,533

Premises

Rent 52,412 50,513

Rates, management fees and others 12,579 11,527

Other expenses 42,206 31,517

Depreciation 10,661 12,806

422,829 385,896

Loss and total comprehensive income for the quarter (50,581) (31,457)

Condensed consolidated statement of profit or loss and other comprehensive income (unaudited and unreviewed)For the three months ended 30 September 2016 (Expressed in Hong Kong dollars)

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The notes on pages 26 to 28 form part of the condensed consolidated financial statements.

Note

Unaudited Six months

ended30 September

2016


ended30 September

2015$’000 $’000

Income

Levies 502,218 935,731

Fees and charges 68,092 70,523

Investment income/(loss) 88,205 (35,259)

Less : custody and advisory expenses (2,683) (1,785)

Investment income/(loss) net of third party expenses 85,522 (37,044)

Recoveries from the Investor Compensation Fund 2,780 2,688

Other income 440 837

659,052 972,735

Expenses

Staff costs and directors’ emoluments 8(b) 601,953 549,771

Premises

Rent 103,922 101,026

Rates, management fees and others 24,831 22,913

Other expenses 86,206 58,153


838,258 755,482

(Loss)/surplus and total comprehensive income for the period (179,206) 217,253

Condensed consolidated statement of profit or loss and other comprehensive incomeFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

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Condensed consolidated statement of financial position

Note

UnauditedAt

30 September 2016

AuditedAt

31 March2016

$’000 $’000

Non–current assets

Fixed assets 68,905 73,247

Held–to–maturity debt securities 2 – 30,009

68,905 103,256

Current assets

Held–to–maturity debt securities 2 436,942 461,781

Financial assets designated at fair value through profit or loss

Debt securities 764,953 –

Pooled funds 706,243 654,585

Debtors, deposits and prepayments 160,514 122,458

Fixed deposits with banks 3 5,172,044 6,066,032

Cash at bank and in hand 3 22,300 25,649

7,262,996 7,330,505

Current liabilities

Fees received in advance 7,908 8,405

Creditors and accrued charges 196,979 121,969

204,887 130,374

Net current assets 7,058,109 7,200,131

Total assets less current liabilities 7,127,014 7,303,387

Non–current liabilities 4 28,680 25,847

Net assets 7,098,334 7,277,540

Funding and reserves

Initial funding by Government 42,840 42,840

Reserve for property acquisition 10 3,000,000 –

Accumulated surplus 4,055,494 7,234,700

7,098,334 7,277,540

At 30 September 2016 (Expressed in Hong Kong dollars)

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Condensed statement of financial position

Note

UnauditedAt

30 September 2016

AuditedAt

31 March2016

$’000 $’000

Non–current assets

Fixed assets 68,493 72,701

Held–to–maturity debt securities 2 – 30,009

68,493 102,710

Current assets

Held–to–maturity debt securities 2 436,942 461,781


Debt securities 764,953 –

Pooled funds 706,243 654,585

Debtors, deposits and prepayments 163,012 134,872

Fixed deposits with banks 5,172,044 6,066,032

Cash at bank and in hand 14,646 5,058

7,257,840 7,322,328

Current liabilities

Fees received in advance 7,908 8,405


199,319 121,651


Total assets less current liabilities 7,127,014 7,303,387

Non–current liabilities 4 28,680 25,847

Net assets 7,098,334 7,277,540

Funding and reserves

Initial funding by Government 42,840 42,840

Reserve for property acquisition 10 3,000,000 –


7,098,334 7,277,540


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Condensed consolidated statement of changes in equity

UnauditedInitial

funding by Government

UnauditedReserve for

property acquisition

UnauditedAccumulated

surplusUnaudited

Total$’000 $’000 $’000 $’000

Balance at 1 April 2015 42,840 – 7,198,353 7,241,193

Surplus and total comprehensive income for the period – – 217,253 217,253

Balance at 30 September 2015 42,840 – 7,415,606 7,458,446

Balance at 1 April 2016 42,840 – 7,234,700 7,277,540

Transfer to reserve for property acquisition – – (3,000,000) (3,000,000)

Reserve for property acquisition – 3,000,000 – 3,000,000

Loss and total comprehensive income for the period – – (179,206) (179,206)

Balance at 30 September 2016 42,840 3,000,000 4,055,494 7,098,334

For the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

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Note

UnauditedSix months

ended 30 September

2016

UnauditedSix months

ended30 September

2015$’000 $’000

Cash flows from operating activities

(Loss)/surplus for the period (179,206) 217,253

Adjustments for:


Investment (income)/loss (88,205) 35,259

Exchange difference 566 559

Loss on disposal of fixed assets 7 12

(245,492) 276,702

(Increase)/decrease in debtors, deposits and prepayments (30,105) 2,340

Increase in creditors and accrued charges 75,010 55,647

Decrease in fees received in advance (497) (1,013)

Increase in non-current liabilities 2,833 2,429

Net cash (used in)/generated from operating activities (198,251) 336,105

Cash flows from investing activities

Increase in fixed deposits other than cash and cash equivalents (459,276) (1,513,190)

Interest received 29,653 29,948

Held-to-maturity debt securities redeemed at maturity 53,800 380,305

Debt securities purchased (1,116,325) –

Debt securities sold 349,649 –

Pooled funds sold 1,148 1,297

Fixed assets purchased (17,011) (13,632)

Net cash used in investing activities (1,158,362) (1,115,272)

Net decrease in cash and cash equivalents (1,356,613) (779,167)

Cash and cash equivalents at beginning of the six-month period 1,522,116 2,104,324

Cash and cash equivalents at end of the six-month period 3 165,503 1,325,157

Analysis of the balance of cash and cash equivalents

UnauditedAt

30 September 2016

UnauditedAt

30 September2015

$’000 $’000

Fixed deposits with banks 143,203 1,311,969


165,503 1,325,157

Condensed consolidated statement of cash flowsFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)


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Notes to the condensed consolidated financial statements

1. Basis of preparationWe have prepared the condensed consolidated interim financial information in accordance with Hong Kong Accounting Standard (HKAS) 34, Interim financial reporting adopted by the Hong Kong Institute of Certified Public Accountants (HKICPA).

This condensed consolidated interim financial information contains condensed consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the SFC since the annual financial statements for the year ended 31 March 2016. The condensed consolidated interim financial statements and notes thereon do not include all of the information required for full set of financial statements prepared in accordance with Hong Kong Financial Reporting Standards (HKFRSs).

The condensed consolidated interim financial information is unaudited and the financial information relating to the financial year ended 31 March 2016 included in this report does not constitute the SFC’s statutory annual financial statements for that financial year but is derived from those financial statements.

We consolidated the financial results of the Investor Compensation Company Limited (ICC) and Investor Education Centre (IEC) in the SFC’s condensed financial statements made up to 30 September 2016. We eliminated all material intragroup balances and transactions in preparing the condensed consolidated financial statements. We have applied the same accounting policies adopted in the consolidated financial statements for the year ended 31 March 2016 to the condensed interim financial information.

There were no significant changes in the operations of the SFC for the six months ended 30 September 2016.

2. Held-to-maturity debt securitiesAs of 30 September 2016, the total market value of held-to-maturity debt securities amounted to $437,345,000 (31 March 2016: $492,756,000), which was above the total carrying value of $436,942,000 (31 March 2016: $491,790,000).

3. Cash and cash equivalentsReconciliation with the condensed consolidated statement of financial position

Unaudited At

30 September 2016

AuditedAt

31 March 2016

$’000 $’000


Fixed deposits with banks 5,172,044 6,066,032

Amounts shown in the condensed consolidated statement of financial position 5,194,344 6,091,681

Less : Amounts with an original maturity of beyond three months (5,028,841) (4,569,565)

Cash and cash equivalents in the condensed consolidated statement of cash flows 165,503 1,522,116


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4. Non–current liabilitiesNon-current liabilities represent deferred lease incentives and provision for premises reinstatement cost. Deferred lease incentives consist of incentives granted by our landlord in connection with the lease of our office premises. We recognise the deferred lease incentives in our condensed consolidated statement of comprehensive income on a straight line basis over the lease period ranging from 2015 to 2017 as an integral part of rental expense.

5. Ageing analysis of debtors and creditorsThere was no material overdue debtor balance or creditor balance included in “debtors, deposits and prepayments” and “creditors and accrued charges” respectively as at 30 September 2016. Therefore we do not provide an ageing analysis of debtors and creditors.

6. Exchange fluctuationThe SFC’s investment guidelines for our investment portfolio only allow investments in assets denominated in Hong Kong dollars, US dollars and renminbi. Exposure in renminbi should not exceed 5% of the investment portfolio. As the majority of the financial assets are denominated in either US dollars or Hong Kong dollars which are closely pegged, we do not consider we are exposed to significant exchange rate risk.

7. Investment in subsidiariesThe SFC formed the ICC on 11 September 2002 with an issued share capital of $0.2. On 20 November 2012, the SFC launched the IEC as a company limited by guarantee and not having a share capital. Both companies are wholly owned subsidiaries of the SFC and are incorporated in Hong Kong.

The objective of the ICC is to facilitate the administration and management of the Investor Compensation Fund (ICF) established under the Securities and Futures Ordinance (SFO).

The objective of the IEC is to improve the financial knowledge and capability of the general public and to assist them in making informed financial decisions.

As at 30 September 2016, the investments in subsidiaries, which are stated at cost less any impairment losses, amounted to $0.2 (at 31 March 2016: $0.2). The balance is too small to appear on the statement of financial position which is expressed in thousands of dollars.

The financial statements of the ICC and IEC are included in the condensed consolidated financial statements.

8. Related party transactionsWe have related party relationships with the ICF, the Unified Exchange Compensation Fund, the Securities Ordinance (Chapter 333) - Dealers’ Deposits Fund, the Commodities Trading Ordinance (Chapter 250) - Dealers’ Deposits Fund and the Securities Ordinance (Chapter 333) - Securities Margin Financiers’ Security Fund. In addition to the transactions and balances disclosed elsewhere in these financial statements, we entered into the following material related party transactions :

(a) During the period, we received reimbursement from the ICF for all the ICC’s expenses amounting to $2,780,000 (2015: $2,688,000), which is in accordance with section 242(1) of the SFO. As at 30 September 2016, the amount due to the ICF from the ICC was $511,000 (at 31 March 2016: $73,000).

Notes to the condensed consolidated financial statementsFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

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Notes to the condensed consolidated financial statementsFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

8. Related party transactions (cont’d)

(b) Remuneration of key management personnel comprised:


ended 30 September

2016

UnauditedSix months

ended 30 September

2015

$’000 $’000

Directors' fees and salaries, allowances and benefits in kind 15,295 16,099

Retirement scheme contributions 1,355 1,471

16,650 17,570

The total remuneration is included in “staff costs and directors’ emoluments” on page 21. Discretionary pay is not included above as the decision to pay is subject to the approval process towards the end of the financial year and therefore is not determined until then.

9. Commitment to pay rents for officesAt 30 September 2016 the minimum amount we are committed to pay in rent for our offices up to 31 August 2020, being the rent review date as set out in the lease agreements, are as follows :

Unaudited At

30 September 2016

AuditedAt

31 March 2016

$’000 $’000

Payable next year 214,700 208,294

Payable in one to five years 576,198 87,619

Payable in more than five years – –

790,898 295,913

During the period, $103,922,000 net of lease incentives was recognised as an expense in the condensed consolidated statement of comprehensive income in respect of operating leases (2015: $101,026,000).

10. Funding and reserve managementDuring the period, the SFC has earmarked $3 billion from its accumulated surplus to set up a reserve for the possible future acquisition of office premises. The SFC’s investment holdings and available cash balances will be used to support this reserve.

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Investor Compensation Fund

The members of the Investor Compensation Fund Committee (the Committee) present their half-yearly report and the unaudited condensed financial statements for the six months ended 30 September 2016.

Establishment of the Investor Compensation Fund Part XII of the Securities and Futures Ordinance (Chapter 571) established the Investor Compensation Fund (the Fund) on 1 April 2003.

Financial statementsThe financial performance of the Fund for the reporting period ended 30 September 2016 and the financial position of the Fund as at that date are set out in the financial statements on pages 31 to 37.

Members of the CommitteeThe members of the Committee during the six months ended 30 September 2016 and up to the date of this report were:

Mr Keith Lui (Chairman) Ms Teresa Ko Yuk-yin, JP Mr Lee Kwok Keung Mr Thomas Allan Atkinson (appointed on 28 September 2016)

Interests in contractsNo contract of significance to which the Fund was a party and in which a Committee member had a material interest, whether directly or indirectly, subsisted at the end of the reporting period or at any time during the six months.

On behalf of the Committee

Keith Lui Chairman

5 December 2016

Report of the Investor Compensation Fund Committee

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IntroductionWe have reviewed the accompanying condensed statement of financial position of Investor Compensation Fund (the Fund)

(established in Hong Kong under Part XII of the Securities and Futures Ordinance) as at 30 September 2016, the condensed statements of profit or loss and other comprehensive income, changes in equity and cash flows for the six-month period then ended, and notes to the interim financial information on pages 32 to 37 (the condensed interim financial information). The directors are responsible for the preparation and presentation of this condensed interim financial information in accordance with Hong Kong Accounting Standard (HKAS) 34, Interim financial reporting. Our responsibility is to form a conclusion on this condensed interim financial information based on our review.

Scope of review We conducted our review in accordance with the Hong Kong Standard on Review Engagements 2410, Review of interim financial information performed by the independent auditor of the entity. A review of the condensed interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

ConclusionBased on our review, nothing has come to our attention that causes us to believe that the accompanying condensed interim financial information as at 30 September 2016 is not prepared, in all material respects, in accordance with HKAS 34, Interim financial reporting.

KPMGCertified Public Accountants8th Floor, Prince’s Building 10 Chater RoadCentral, Hong Kong

5 December 2016

Independent Auditors' Report on Review of Interim Financial Information to the Securities and Futures Commission

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Unaudited and


ended30 September

2016

Unaudited and


ended30 September

2015$’000 $’000

Income

Net investment income/(loss) 30,801 (30,742)

Exchange difference (418) (501)

30,383 (31,243)

Expenses

Investor Compensation Company Limited expenses 1,390 1,342

Compensation (write-backs)/expenses (294) 6,738

Auditor’s remuneration 32 31

Bank charges 247 234

Professional fees 970 928

2,345 9,273

Surplus/(loss) and total comprehensive income for the quarter 28,038 (40,516)

Condensed statement of profit or loss and other comprehensive income (unaudited and unreviewed)For the three months ended 30 September 2016 (Expressed in Hong Kong dollars)

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The notes on pages 36 to 37 form part of the condensed financial statements.

Note

UnauditedSix months

ended30 September

2016

UnauditedSix months

ended30 September

2015$’000 $’000

Income

Net investment income/(loss) 54,530 (29,415)

Exchange difference (160) (589)

54,370 (30,004)

Expenses

Investor Compensation Company Limited expenses 2 2,780 2,688

Compensation (write-backs)/expenses 3 (5) 9,436


Bank charges 482 474

Professional fees 1,944 1,928

5,266 14,588

Surplus/(loss) and total comprehensive income for the period 49,104 (44,592)

Condensed statement of profit or loss and other comprehensive income For the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

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Note

UnauditedAt

30 September 2016

AuditedAt

31 March2016

$’000 $’000

Current assets


Debt securities 1,927,666 1,866,404

Pooled fund 311,557 282,860

Interest receivable 12,622 13,367

Due from Investor Compensation Company Limited 511 73

Fixed deposits with banks 7,449 7,788

Cash at bank 2,837 43,175

2,262,642 2,213,667

Current liabilities

Provision for compensation 3 1,257 1,412


2,659 2,788


Representing:

Compensation fund

Contributions from Unified Exchange Compensation Fund 994,718 994,718

Contributions from Commodity Exchange Compensation Fund 108,923 108,923


2,259,983 2,210,879


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Condensed statement of changes in equity

UnauditedContributions from Unified

ExchangeCompensation

Fund

UnauditedContributions

from Commodity Exchange

Compensation Fund


surplusUnaudited

Total$’000 $’000 $’000 $’000

Balance at 1 April 2015 994,718 108,923 1,111,180 2,214,821

Loss and total comprehensive income for the period – – (44,592) (44,592)

Balance at 30 September 2015 994,718 108,923 1,066,588 2,170,229

Balance at 1 April 2016 994,718 108,923 1,107,238 2,210,879

Surplus and total comprehensive income for the period – – 49,104 49,104

Balance at 30 September 2016 994,718 108,923 1,156,342 2,259,983


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UnauditedSix months

ended 30 September

2016

UnauditedSix months

ended30 September

2015$’000 $’000


Surplus/(loss) for the period 49,104 (44,592)

Adjustments for:

Net investment (income)/loss (54,530) 29,415

Exchange difference 160 589

(5,266) (14,588)

Increase in amount due from Investor Compensation Company Limited (438) (310)

Decrease in provision for compensation (155) (17,646)

Increase/(decrease) in creditors and accrued charges 26 (61)

Net cash used in operating activities (5,833) (32,605)


Increase in fixed deposits other than cash and cash equivalents – (1,700)

Purchase of debt securities (305,958) (324,825)

Sale or maturity of debt securities 246,654 342,990

Sale of equity securities 694 761

Interest received 23,766 24,478

Net cash (used in)/generated from investing activities (34,844) 41,704

Net (decrease)/increase in cash and cash equivalents (40,677) 9,099

Cash and cash equivalents at beginning of the six-month period 50,963 54,045

Cash and cash equivalents at end of the six-month period 10,286 63,144


UnauditedAt

30 September 2016

UnauditedAt

30 September2015

$’000 $’000


Cash at bank 2,837 5,053

10,286 63,144

Condensed statement of cash flowsFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)


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Notes to the condensed financial statementsFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

1. Basis of preparationThe Fund has prepared the condensed interim financial information in accordance with Hong Kong Accounting Standard (HKAS) 34, Interim financial reporting adopted by the Hong Kong Institute of Certified Public Accountants (HKICPA).

This condensed interim financial information contains condensed financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Fund since the annual financial statements for the year ended 31 March 2016. The condensed interim financial statements and notes thereon do not include all of the information required for full set of financial statements prepared in accordance with Hong Kong Financial Reporting Standards (HKFRSs).

The condensed interim financial information is unaudited and the financial information relating to the financial year ended 31 March 2016 included in this report does not constitute the Fund’s statutory annual financial statements for that financial year but is derived from those financial statements.

We have applied the same accounting policies adopted in the financial statements for the year ended 31 March 2016 to the condensed interim financial information.

There were no significant changes in the operations of the Fund for the six months ended 30 September 2016.

2. Investor Compensation Company Limited expensesThe Securities and Futures Commission (SFC) formed the Investor Compensation Company Limited (ICC) in September 2002 to perform functions on behalf of the Fund in relation to the compensation to investors and other functions under Part III and Part XII of the Securities and Futures Ordinance (SFO). The Fund is responsible for funding the establishment and operation of the ICC. For the six months ended 30 September 2016, the ICC incurred $2,780,000 for its operations and was reimbursed by the Fund (for the six months ended 30 September 2015 : $2,688,000).

3. Provision for compensation

$’000

Balance as at 1 April 2015 43,808

Add: compensation expenses during the year ended 31 March 2016 11,142

Less: compensation write-backs during the year ended 31 March 2016 (3,801)

Less: compensation paid during the year ended 31 March 2016 (49,737)

Balance as at 31 March 2016 and 1 April 2016 1,412

Add: compensation expenses during the six months ended 30 September 2016 289

Less: compensation write-backs during the six months ended 30 September 2016 (294)

Less: compensation paid during the six months ended 30 September 2016 (150)

Balance as at 30 September 2016 1,257

As at 30 September 2016, the provision for compensation relates to a number of claims received in respect of two default cases. The maximum liability of the Fund to claims for these cases are set at $150,000 per claimant. The provision for compensation at 30 September 2016 was $1,257,000 (31 March 2016: $1,412,000). As at 30 September 2016, all provisions were expected to be paid within one year.

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4. Material related party transactionsWe have related party relationships with the SFC, the ICC and the Unified Exchange Compensation Fund. There were no significant related party transactions other than those disclosed in the condensed interim financial information of the Fund for the six months ended 30 September 2015 and 2016.

5. Contingent liabilitiesAs at the date of this report, in addition to the provision made as described in note 3, there are other claims received for which currently there is insufficient information to determine the likely level of payment. The maximum liability of these claims is $2,981,000 (31 March 2016: $2,619,000). This is determined based on the lower of the maximum compensation limit of $150,000 per claimant or the amount claimed.


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Unified Exchange Compensation Fund

The members of the Securities Compensation Fund Committee (the Committee) present their half-yearly report and the unaudited condensed financial statements for the six months ended 30 September 2016.

Establishment of the Unified Exchange Compensation Fund Part X of the repealed Securities Ordinance (Chapter 333) established the Unified Exchange Compensation Fund (the Fund). However, when the Securities and Futures Ordinance (SFO) and its subsidiary legislation came into effect on 1 April 2003, a new single Investor Compensation Fund (ICF) was formed to ultimately replace the Fund and the Commodity Exchange Compensation Fund. Up to 30 September 2016, the Fund transferred $994,718,000 to the ICF. After settlement of all claims against the Fund and its other liabilities, the Securities and Futures Commission (SFC) will eventually transfer the remaining balance of the Fund to the ICF.

Part X of the repealed Securities Ordinance remains effective in respect of the operation of the Fund to the extent described in Section 74 of Schedule 10 of the SFO.

Financial statementsThe financial performance of the Fund for the reporting period ended 30 September 2016 and the financial position of the Fund as at that date are set out in the financial statements on pages 40 to 46.

Members of the CommitteeThe members of the Committee during the six months ended 30 September 2016 and up to the date of this report were:

Mr Keith Lui (Chairman) Ms Mak Po Shuen Ms Teresa Ko Yuk-yin, JP Mr Lee Kwok Keung Mr Thomas Allan Atkinson (appointed on 28 September 2016)

Interests in contractsNo contract of significance to which the Fund was a party and in which a Committee member of the Fund had a material interest, subsisted at the end of the reporting period or at any time during the six months.

On behalf of the Committee

Keith Lui Chairman

21 November 2016

Report of the Securities Compensation Fund Committee

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IntroductionWe have reviewed the accompanying condensed statement of financial position of the Unified Exchange Compensation Fund (the Fund) (established under section 99 of the repealed Hong Kong Securities Ordinance) as at 30 September 2016, the condensed statements of profit or loss and other comprehensive income, changes in equity and cash flows for the six-month period then ended, and notes to the interim financial information on pages 41 to 46 (the condensed interim financial information). The directors are responsible for the preparation and presentation of this condensed interim financial information in accordance with Hong Kong Accounting Standard (HKAS) 34, Interim financial reporting. Our responsibility is to form a conclusion on this condensed interim financial information based on our review.

Scope of review We conducted our review in accordance with the Hong Kong Standard on Review Engagements 2410, Review of interim financial information performed by the independent auditor of the entity. A review of the condensed interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

ConclusionBased on our review, nothing has come to our attention that causes us to believe that the accompanying condensed interim financial information as at 30 September 2016 is not prepared, in all material respects, in accordance with HKAS 34, Interim financial reporting.

KPMGCertified Public Accountants8th Floor, Prince’s Building 10 Chater RoadCentral, Hong Kong

21 November 2016

Independent Auditors' Report on Review of Interim Financial Information to the Securities and Futures Commission

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Unaudited and


ended30 September

2016

Unaudited and


ended30 September

2015$’000 $’000

Income

Interest income 120 121

Expenses



24 22

Surplus and total comprehensive income for the quarter 96 99

Condensed statement of profit or loss and other comprehensive income (unaudited and unreviewed)For the three months ended 30 September 2016 (Expressed in Hong Kong dollars)

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Note

UnauditedSix months

ended30 September

2016

UnauditedSix months

ended30 September

2015$’000 $’000

Income

Interest income 246 271

Expenses

Recoveries re-distributed 3 1,152 –



Sundry expenses 3 –

1,201 44

(Loss)/surplus and total comprehensive income for the period (955) 227

Condensed statement of profit or loss and other comprehensive income For the six months ended 30 September 2016 (Expressed in Hong Kong dollars)

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Note

UnauditedAt

30 September 2016

AuditedAt

31 March2016

$’000 $’000

Current assets

Equity securities received under subrogation 2 1 1

Interest receivable 51 59


Cash at bank 224 278

82,807 82,517

Current liabilities


Relinquished trading rights payable to SEHK 4 1,000 800

11,301 11,106

Net current assets 71,506 71,411

Net assets 71,506 71,411

Representing:

Compensation fund

Contributions from SEHK 4 50,100 49,050

Excess transaction levy from SEHK 353,787 353,787

Special contribution 3,500 3,500

Additional contribution from SEHK 300,000 300,000

Additional contribution from the SFC 330,000 330,000

Special levy surplus 3,002 3,002

Accumulated surplus 25,835 26,790

1,066,224 1,066,129

Contributions to the Investor Compensation Fund (994,718) (994,718)

71,506 71,411



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Condensed statement of changes in equityFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)


from SEHK

UnauditedExcess

transaction levy

from SEHK

UnauditedSpecial

contributions and special

levy surplus

UnauditedAdditional

contributions from

SEHK and the SFC


surplus


to Investor Compensation

FundUnaudited

Total$’000 $’000 $’000 $’000 $’000 $’000 $’000

Balance at 1 April 2015 48,100 353,787 6,502 630,000 26,342 (994,718) 70,013

Net contributions from SEHK 150 – – – – – 150

Surplus and total comprehensive income for the period – – – – 227 – 227

Balance at 30 September 2015 48,250 353,787 6,502 630,000 26,569 (994,718) 70,390

Balance at 1 April 2016 49,050 353,787 6,502 630,000 26,790 (994,718) 71,411

Net contributions from SEHK 1,050 – – – – – 1,050

Loss and total comprehensive income for the period – – – – (955) – (955)

Balance at 30 September 2016 50,100 353,787 6,502 630,000 25,835 (994,718) 71,506


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UnauditedSix months

ended 30 September

2016

UnauditedSix months

ended30 September

2015$’000 $’000


(Loss)/surplus for the period (955) 227

Adjustments for:

Interest income (246) (271)

(1,201) (44)

Decrease in creditors and accrued charges (5) (6)

Increase/(decrease) in relinquished trading rights payable to SEHK 200 (1,200)

Net cash used in operating activities (1,006) (1,250)


Increase in fixed deposits other than cash and cash equivalents – (34,776)

Interest received 254 275

Net cash generated from/(used in) investing activities 254 (34,501)

Cash flows from financing activities

Net contributions from SEHK 1,050 150

Net cash generated from financing activities 1,050 150

Net increase/(decrease) in cash and cash equivalents 298 (35,601)

Cash and cash equivalents at beginning of the six-month period 82,457 82,357

Cash and cash equivalents at end of the six-month period 82,755 46,756


UnauditedAt

30 September 2016

UnauditedAt

30 September2015

$’000 $’000


Cash at bank 224 277

82,755 46,756

Condensed statement of cash flowsFor the six months ended 30 September 2016 (Expressed in Hong Kong dollars)


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1. Basis of preparationThe Fund has prepared the condensed interim financial information in accordance with Hong Kong Accounting Standard (HKAS) 34, Interim financial reporting adopted by the Hong Kong Institute of Certified Public Accountants (HKICPA). As the Fund will eventually cease operation as a result of the Securities and Futures Ordinance (SFO) which came into effect from 1 April 2003, the Fund has prepared the condensed interim financial information on a non-going concern basis. We expect that the operations of the Fund will be maintained until all claims and recoveries from liquidators in relation to the broker defaults that happened on or before 31 March 2003 have been fully settled.

This condensed interim financial information contains condensed financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Fund since the annual financial statements for the year ended 31 March 2016. The condensed interim financial statements and notes thereon do not include all of the information required for full set of financial statements prepared in accordance with Hong Kong Financial Reporting Standards (HKFRSs).

The condensed interim financial information is unaudited and the financial information relating to the financial year ended 31 March 2016 included in this report does not constitute the Fund’s statutory annual financial statements for that financial year but is derived from those financial statements.

We have applied the same accounting policies adopted in the financial statements for the year ended 31 March 2016 to this condensed interim financial information.

There were no significant changes in the operations of the Fund for the six months ended 30 September 2016.

2. Equity securities received under subrogationIn relation to the share distribution from C.A. Pacific Securities Ltd. and C.A. Pacific Finance Ltd., the liquidators had advised the SFC that shares were allocated to the Fund under its subrogation rights, subject to paying a processing fee to the liquidators. The Fund recognised as recoveries the payments from liquidators, the sale proceeds of shares allocated and the remaining shares at market value as of 30 September 2016 after deducting relevant processing fees and charges for collecting and selling the shares received.

The shares allocated to the Fund under its subrogation rights are classified as designated at fair value through profit and loss securities in accordance with the determination in HKAS 39, Financial Instruments: Recognition and measurement. According to HKFRS 13, Fair value measurement, these subrogated shares shall be classified as level 1 financial instruments as they all have quoted market price (unadjusted) in an active market for an identical instrument. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in “Recoveries”. Dividend income, if any, is also recognised in “Recoveries”.

3. Recoveries re-distributedThe Fund received recoveries by virtue of the SFC’s subrogation rights in respect of claimants who received compensation payments from the Fund. On 17 May 2016, the Securities Compensation Fund Committee of the SFC decided to return the excess amount and relevant interest amount totalled to $1,152,000 to some of the claimants of the C.A. Pacific case. The excess amount for each claimant represents the excess of total recovered amount from the liquidators over the compensation amount paid to the claimant.

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4. Contributions from SEHK/Relinquished trading rights payable to SEHKAccording to Section 104 of the repealed Securities Ordinance, The Stock Exchange of Hong Kong Limited (SEHK) contributes to the Fund in respect of each trading right at the rate of $50,000 per trading right. In the absence of claims or other provisions as set out in the repealed Securities Ordinance, the SFC must refund to SEHK the deposit within six months after the trading right was relinquished.

During the six-month period, deposits of $1,250,000 in respect of 25 new trading rights were received from SEHK and no trading rights were refunded.

At 30 September 2016, there were 20 trading rights in total that have been relinquished but not yet refunded (at 31 March 2016: 16). The net contributions from SEHK at 30 September 2016, excluding the relinquished trading rights payable, amounted to $50,100,000 (at 31 March 2016: $49,050,000).

5. Material related party transactionsWe have related party relationships with the Investor Compensation Fund and the SFC. There were no significant related party transactions other than those disclosed in the condensed interim financial information of the Fund for the six months ended 30 September 2015 and 2016.

6. Contingent liabilitiesAs at the date of this report, there is no outstanding claim against the Fund.

In relation to the default cases, any excess of recovered amounts (refer to note 2) will be re-distributed to claimants. As the timing of re-distribution and amount of these potential excess amounts are uncertain at the date of this report, we disclose this as a contingent liability.


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